The quality growth funds EQ Investors has been topping-up

Troy’s Trojan, Fundsmith Equity and First State Global Listed Infrastructure are three quality-growth funds for investors to consider in the late-cycle environment, according to EQ Investors’ Kasim Zafar.

Instead, the team has been increasing allocation to quality growth, a style they noted performs well across different economic environments and where they believe investors should position in this late-cycle environment.

“We’ve looked at how styles performed depending on which of the four stages of the economic cycle you are in, and what we found is that quality as a style performs very well across most,” Zafar noted.

“It does very well in the peaking phase and the recessionary phase of the cycle, meanwhile growth as a style does incredibly well in the expansionary phases and the recovery phases and does okay in the peaking phase but does horribly in the recessions.

“So, if that analysis is taken as truth then if we are worried about getting late cycle it makes sense to reduce all our exposure to high growth; but unless you believe that we are going into a recessionary environment, it doesn’t yet make sense to make a full style-tilt into value in the US market.”

Reflecting this style view, the team has trimmed their position in pure value strategies or high growth ones, such as Rathbone Global Opportunities.

Performance of fund vs sector & benchmark over 5yrs

Source: FE Analytics

“We have reduced Rathbone Global Opportunities, [but] we still have a 100 per cent conviction in that fund,” he explained. “There is no change in the fund recommendation or anything, we are purely expressing a style view in the change of allocations.

“If anyone asked me for a recommendation of a global growth fund, Rathbone Global Opportunities would be the one that I recommend,” Zafar explained.

Below Zafar considers the three quality growth funds that the team has topped-up for the late-cycle environment: Troy Asset Management’s Trojan fund, Fundsmith Equity and First State Global Listed Infrastructure.

Fundsmith Equity

Veteran investor Terry Smith’s popular strategy Fundsmith Equity is the first of the funds that the team behind EQ Investor’s Best Ideas portfolios has recently increased its allocation to.

Smith runs a concentrated portfolio of between 20 to 25 names and looks for companies able to generate sustainable returns of more than 10 per cent on investor capital.

The £16.2bn portfolio tends to have a bias towards large growth global franchises whose growth is driven from reinvestment of cashflows.

“We like the simplicity of the investment process, and the focus on long term growth and low turnover,” he explained. “There is a clear alignment of interest between the manager and senior partners, who have a significant amount of their wealth invested in the fund.”

Over five years, Fundsmith Equity has delivered a 134.65 per cent total return compared with a gain of 53.12 per cent for the average fund in the IA Global Sector and a 48.47 per cent gain for the MSCI World index. It has an ongoing charges figure (OCF) of 1.05 per cent.

Trojan

The next strategy the team has been buying into is FE Alpha Manager Sebastian Lyon’s Trojan fund, a multi-asset fund Zafar noted has “the right kind of exposures” that he is comfortable with.

“The equity content is quality growth equities and, as we didn’t want to have a massive position in Fundsmith Equity, we chose to complement it with Troy Trojan,” the portfolio manager said.

“This means that we get exposure to other asset classes such as bond and gold,” he said.

Performance of fund vs sector & index over 5yrs

Source: FE Analytics

Zafar added: “Within equities they are focused on quality equities, they are very valuation-conscious. They have a lot of cash, so they will sell out of companies when they think they’ve got too expensive and then they are happy to hold cash until they think valuations have come down to lower levels.

“They have allocation to inflation-linked securities but – unlike some other funds in the space – they are very worried about duration, so they have short duration inflation-linked securities in the portfolio.”

The £4.1bn fund has exposure to gold, which Zafar noting: “If there is one part I’m not comfortable with, I don’t mind it being gold”.

While the IA Flexible investment sector and the FTSE All Share have delivered respective total returns of 31.14 per cent and 28.90 per cent over five years, Troy’s Trojan is up by 27 per cent. It has an OCF of 1.02 per cent.

“We like the fund due to its very well-developed process and significantly experienced team, some of whom have worked in the sector since its creation in the 1990s,” he explained.

“As one of the first funds investing in global infrastructure equities, they have built one of the strongest track records in the sector, performing extremely well in up and down markets and with relatively low correlation to other asset classes; characteristics which we view favourably in the sector.”

Although First State Global Listed Infrastructure has underperformed the market so far in 2018, the fund has had a strong performance since its inception in 2007, having delivered gains of 153.11 per cent.

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